Impact of China’s Revised FDI Laws and WTO Entry on FDI in
China: Implications for Chinese Policy Makers
College of Business, Hangzhou Institute of Electronic Engineering, P. R. China, 310012
Abstract: By March 15, 2001, China had revised the three laws concerning its foreign direct investment (FDI)
in order to fulfill its commitments contained in its agreements with the World Trade Organization (WTO)
members. The revised FDI laws will certainly contribute to China’s early entry into the WTO. China’s
presence in the WTO not only will bring China into the last major international organization from which it is
still absent, but it also will confirm the country’s emergence as a trading power and its readiness to assume
responsibility as an equal partner in a trading system that depends on the open markets of its important
members to thrive. The revised FDI laws will have direct impact on investor confidence, economic activity,
and growth. By setting out liberalizing investment measures to be implemented in steps over the next few
years, China would reduce the erratic nature of many regulatory changes and bring a steady and predictable
rhythm of economic reforms on which foreign investors can base their business strategies and expansion plans.
It would also encourage enormous outside confidence in the government’s ability to steer the reform process to
a conclusion and establish a full market economy.
This paper at first reviews the changing patterns of inward FDI in China and explains the revised
contents in China’s FDI laws. It then explores how China’s revised FDI laws and its WTO membership will
affect inward FDI in different sectors in China. Finally it examines how China can, or must] formulate FDI
policies to ensure continuing inflow of foreign capital into areas and regions which need such capital injection
for further economic development. The paper concludes that China’s inward FDI will no doubt expand to a
great extent after China’s entry into WTO, an expansion will provide both overseas investors and China’s
domestic enterprises with more opportunities than challenges. Finally the paper offers China’s business
leaders and managers some suggestions concerning how to take advantages of the opportunities in meeting the
Key words: FDI, Law, China, WTO, Economy, Development
China has been the biggest recipient of FDI among the developing countries and the second largest
recipient, exceeded only by the United States, for the last seven years since 1993. China’s entry into the WTO
in the near future will open China's door more widely and present many additional business opportunities to
overseas investors in the country. Since China has reached a WTO agreement with the USA on November 15,
1999, and with many other WTO members thereafter, China’s entry into WTO is just around the corner. It will
have both good and bad effects on China’s inward FDI. China will have both opportunities and challenges in
its economic development after its entry into WTO. This paper first reviews the changing patterns of inward
FDI in China and explains the revised contents of FDI laws, then explores how WTO membership will affect
inward direct investment in different sectors in China. It also considers how to formulate FDI policies to
ensure continuing inflow of foreign capital into areas and regions which need such capital injection for further
2 The Changing Patterns of Inward FDI in China
Between 1979 (when inward FDI was legally permitted in China) and February 2000, China had approved
344,280 projects. The cumulative contracted investment had amounted to US$620.317 billion, according to
the sources from the Ministry of Economy and Trade of China. By the end of October 1998, the actual utilized
investment had amounted to US$257.778 billion. The number of projects already in operation and in
production had reached over 145,000, and these had employed 18 million people, accounting for 10% of the
working population in the non-agricultural sectors (International Business Daily, November, 24 & 25,1998).
From 1979 to 1996, China’s inward FDI increased by 40% annually (Zhang Fangfang & Su Xiaofang,
International Economic Cooperation (IEC), No. 1, 1998). In 1997 more than 130 countries and regions
invested in China (IEC No. 4, 1998) and the volume of imports and exports of foreign-invested enterprises
(FIE) in China reached US$152.62 billion, accounting for 46.95% of its total (Hu Jingyan, IEC, No. 9, 1998).
Since 1993, for the last seven years, China has been the top recipient of inward FDI among the developing
countries and has ranked number two in attracting FDI in the world, second only to the USA. The following
offers statistical analysis of FDI in China in the last two decades.
2.1 Changes in FDI Patterns in Four Periods
China’s FDI can be divided into four periods. They are the experimental period from 1979 to 1986, the
growth period from 1987 to 1991, the boom period from 1992 to 1996[,] and the adjustment period from 1997
to the present.
During the experimental period, China actually utilized US$8.304 billion, with an annual average of
US$1.038 billion. The period was characterized by small investment projects, high investment costs,
restrictive price controls, poor infrastructure, and lack of legal framework. The growth period was marked by
an improved legal environment and increased volume of FDI. During the boom period, China became the
largest recipient of FDI among all developing countries. The volume of FDI accelerated, averaging
US$30.307 billion a year, as compared to US$1.037 billion between 1979 and 1986 and US$6.8 billion
between 1987 and 1991 The adjustment period was characterized by the transition into a market economy and
integration into a world economy. Further improved infrastructure and an investment environment allowed
China to ride out the Asian financial crisis smoothly, and FDI continued to increase after some slowdown
during the Asian crisis.
Table 1: China’s FDI by four periods ( in $US billion )
Period Project Numbers Contracted Investment Utilized Investment
1979-1986 8,295 19.413 8.304
Annual average 1,037 2.427 1.038
1987-1991 34,208 33.179 16.754
Annual average 6,842 6.636 3.351
1992-1996 241,317 416.799 151.537
Annual average 48,263 83.36 30.307
1997-1999 57,718 144.328 131.118
Annual average 19,239 48.109 43.706
Source: Almanac of China’s Foreign Economy and Trade, various years; China Foreign Investment,
September, 1999, Issue 82; and China Statistical Yearbook.
2.2 Sources of FDI
Although FDI in China comes from over 170 countries and regions all over the world, four
countries/regions account for 85% of the total FDI in China. Ethnic Chinese investors from Hong Kong,
Macao, and Taiwan accounted for about 67% of the actual utilized FDI in 1992 to 1996. The other major
sources of China’s FDI are the USA, Japan, Asia and Europe. The United Kingdom, France, and Germany are
major European investors. Singapore, Malaysia, Thailand, South Korea, and the Philippines are major Asian
investors. ( Source: Almanac of China’s Foreign Economy and Trade, and China Statistical Yearbook, various
Table 2 The 15 Major Investors in China by the end of 1998 (Unit: US$0.1 billion)
Country Project No. Share Contracted Share Utilized Share
% Capital % Capital %
Total 324620 100 5724.94 100 2673.12 100
Hong Kong 178922 55.12 2976.28 51.99 1384.34 51.79
Japan 17602 5.42 325.43 5.68 219.12 8.20
USA 26674 8.22 465.94 8.14 214.33 8.02
Taiwan 41077 12.64 404.00 7.06 212.65 7.96
Singapore 7997 2.46 310.91 5.43 121.77 4.56
South Korea 11179 3.44 148.37 2.59 75.62 2.83
Virgin Islands 1536 0.47 169.17 2.96 67.36 2.52
UK 2324 0.72 150.55 2.63 65.40 2.45
Germany 1932 0.60 83.97 1.47 34.38 1.29
Macao 6164 1.90 88.83 1.55 33.28 1.24
France 1473 0.45 46.43 0.81 26.98 1.01
Malaysia 1780 0.55 24.81 0.75 17.64 0.66
Canada 3984 1.23 63.66 1.11 17.34 0.65
Netherlands 644 0.20 33.94 0.59 16.59 0.62
Thailand 2631 0.81 45.55 0.80 16.41 0.61
Others 18759 5.78 369.12 6.45 149.91 5.61
Source：Almanac of China’s Foreign Economy and Trade, various years
2.3 Forms of FDI
China’s FDI has soared in China not only as an invaluable source of capital, but also has elevated
advanced science, technology and managerial skills in the following five modes: (1) equity joint ventures
(EJV), (2) cooperative joint ventures (CJV), (3) wholly foreign-owned enterprises (WFOE), (4) joint
development ventures, and (5) other foreign investment, such as Build-Operate –Transfer (BOT).
Figure 1. Changing Face of FDI in China
Source: Hill, 2000
The number of wholly owned enterprises (WOS) has been small compared to the number of joint
ventures. According to the previous Law of the PRC on Foreign-Capital Enterprises, WOEs were allowed
only in the following five categories: public utilities, communication and transportation, real estate, leasing
companies, and investment companies (CCPIT, 2000). Projects in these areas are designated as restricted
foreign investment projects, and they have to be approved by China’s Ministry of Foreign Trade and Economic
Corporation. In some areas, joint ventures are required and Chinese partners are mandated to have at least a
50 percent share in the partnership. While the WTO does not yet have a comprehensive set of rules on foreign
investment, such restrictions will have to be phased out to keep China in line with the international trend of
replacing heavy ex-ante foreign investment screening with lighter ex-post policies like anti-trust laws
2.4 Sectorial Distribution
During the early stage the service sector accounted for the majority (62%) of FDI, with 29% going to real
estates and 33% going to public and other services. During later periods, however, FDI in the manufacturing
sector increased from about 58% to 77% when the Chinese government extended the incentives to a wide
range of business activities. In 1995 the Chinese government issued “Guiding Catalogue of Industries for
Foreign Investment” and “Interim Provisions on Guidance for Foreign Investment.” As a result, FDI has been
directed to the capital-intensive and technologically advanced projects from the USA, Japan, and Europe. This
“pick-and-choose” policy significantly affected the sectorial distribution of FDI.
Table 3: Distribution among sectors of China’s inward FDI ( contracted amount, $US million)
Sectors 1979-1986 1987-1991 1992-1996
Agriculture 375 797 5,716
Annual average 47 159 1,143
Share % 1.9 2.4 1.3
Manufacturing 5,425 25,650 239,872
Annual average 678 5,130 47,974
Share % 27.8 77.3 57.8
Services 12,244 6.047 155,095
Annual average 1,530 1,209 31,019
Share % 62.7 18.2 37.3
Real estate &
public services 5,735 4,481 116,397
Annual average 716 896 23,279
Share % 29.38 13.5 28
Other services 6.509 1,566 38,698
Annual average 813 313 7,739
Share % 33.3 4.72 9.3
Others 1475 677 14,354
Annual average 184 135 2,870
Share % 7.6 2.1 3.6
Source: Almanac of China’s Foreign Economy & Trade, and China Statistical Yearbook, various years.
2.5 Geographical Distribution of FDI
FDI in China has been concentrated on the East Coast region, whereas FDI in the Western region has been
insignificant, as seen below:
Table 4: Local distribution of inward FDI in China (actual utilized amount, $US million)
1979-1986 1987-1991 1992-1996
South & Southeast coast 1,768.34 8,861.56 65,893.50
Annual average 221 1,772.30 13,178.70
Share (percent) 59.1 54.37 43.77
East coast 374.09 2,156.40 36,617.18
Annual average 46.76 431.28 7,323.40
Share 12.5 13.2 24.3
Northeast coast 479.92 3,769.18 29,788.36
Annual average 60 753.8 5,957.67
Share (percent) 16 23 19.78
Inland regions 370 1,511 18,239.87
Annual average 46.2 302.2 3,647.97
Share (percent) 12.4 9.43 12.15
Source: Almanac of China’s Foreign Economy & Trade, and China Statistical Yearbook, various years.
As Table 4 shows, the local distribution of inward FDI in China reflects China’s open door policy, which
was initially applied to Special Economic Zones (SEZ), then to open coastal cities and other coastal areas, and
finally to inland regions. We can draw the following observations from Table 4:
(1) The majority of FDI (88% from 1992 to 1996) was directed to the coastal regions where China’s five
SEZs are located because of their geographical advantages, preferential policies in tax concessions,
low land rents, and the cultural and linguistic links among South China, Southeast China, and the
ethnic overseas Chinese communities.
(2) The share of FDI in South China and Southeast China declined steadily from 59% in the
experimental period to 43% in the boom period. The eastern coast region almost doubled its share of
FDI from 12% to 24%. In particular, the Yangtze River Delta (Jiangsu, Shanghai and Zhejiang),
where there are advanced industrial bases and well-developed markets and infrastructure,
experienced dramatic growth. At present, more than half of the world’s top 100 multinational
corporations have invested in Shanghai. The share of FDI in inland provinces increased substantially
in recent years.
(3) In the 1979-1986 period, a large proportion of FDI went into various Ministries of Chinese industries
rather than local regions.
(4) According to Consumer China (1998), rates of investment in the interior are growing at over 27
percent annually, while in coast areas, it is rising by only 11 percent annually. However, poor
infrastructure constitutes a considerable additional barrier to investment in the country’s hinterland,
leading many foreign firms to become disillusioned with the market as a whole.
In summary, in more than two decades China’s inward FDI has
a) offered over 18 million job opportunities and greatly relieved China of its
b) been one of the driving forces in China’s rapid economic development;
c) helped the transfer from other countries to China of advanced science and technical
know-how, and introduced advanced managerial skills and expertise to China;
d) contributed significantly to the rapid development of foreign trade of China and to the
increase of China’s revenues;
e) contributed to the development of China’s legal system and socialist market economic
f) sped up China’s economic integration into the global economy.
3 On the Revised Contents of FDI Laws
Since China reached an agreement with the USA concerning China’s entry into the WTO on
November 15, 2000, and other WTO members thereafter, the process of China’s WTO entry has sped up.
In order to fulfill its agreements with its WTO members and to make China’s laws and rules compatible
with WTO rules and international practices, China has revised all the three FDI laws, namely the Law of
PRC on Foreign Capital Enterprises, the Law of PRC on Chinese-Foreign Contractual Joint Ventures, and
the Law of PRC on Chinese-Foreign Equity Joint Ventures. The main revised contents are as follows:
3.1 Foreign Exchange Balance
Article 20 in Law of PRC on Chinese-Foreign Contractual Joint Ventures was deleted. This Article says:
“ A contractual joint venture shall achieve on its own the balance of its foreign exchange receipts and
expenditures. If a contractual joint venture is unable to achieve the balance of its foreign exchange receipts and
expenditures on its own, it may, in accordance with state provisions, apply to the relevant authorities for
The third clause in Article 18 in Law of PRC on Foreign Capital Enterprises was deleted. This Article
says:“ Enterprises with foreign capital shall manage to balance their own foreign exchange receipts and
payments. If, with the approval of the competent authorities, the enterprises market their products in China
and consequently experience an imbalance in foreign exchange , the said authorities shall help them to correct
The above deletion was made for the following reasons:
a) China’s foreign exchange reserves had increased dramatically since 1990; the Chinese currency
RMB became freely convertible under current account in 1994;
b) The deleted contents are not in conformity with WTO rules.
3.2 First Priority in Purchases in China
The second clause of Article 9 in the Law of PRC on Chinese-Foreign Equity Joint Ventures previously
stated: “In its purchase of its required raw and semi-processed materials, fuels, auxiliary equipment, etc., an
equity joint venture should give first priority to purchases in China. It may also make such purchases directly
on the world market with foreign exchanges raised by itself." It has been changed to read as follows: “In its
purchase of its required raw and semi-processed materials, fuels, auxiliary equipment, etc. within its business
scope approved by the competent authorities, an equity joint venture can buy them either from China’s
domestic market or from the international market.”
Article 15 in the Law of PRC on Foreign Capital Enterprises (which says)[stated]: “Within the scope of
the operations approved, enterprises with foreign capital may purchase, either in China or from the world
market, raw and semi-processed materials, fuels and other materials they need. When these materials are
available from both sources on similar terms, first priority should be given to purchases in China[.]” (,)[It] has
been changed into “Within the scope of the operations approved, enterprises with foreign capital may purchase,
either in China or from the world market, raw and semi-processed materials, fuels and other materials they
need. They can buy them either from China’s domestic market or from the international market.”
The above two changes have been made for these reasons:
a) Under China’s present socialist market economic system, it is completely up to the enterprises
themselves to decide what to buy, how to buy, and where to buy; and the government cannot
interfere in their operations. Therefore, foreign enterprises should be treated as equals to Chinese
enterprises and should enjoy freedom in their purchases.
b) The previous statutes were not in conformity with WTO rules and requirements.
3.3 Export obligations
The first clause of Article 3 in Law of PRC on Foreign Capital Enterprises formerly said: “Enterprises
with foreign capital shall be established in such a manner as to help the development of China’s national
economy; they shall use advanced technology and equipment or market all or most of their products outside
China." It has been changed to state: “Enterprises with foreign capital shall be established in such a manner
as to help the development of China’s national economy; China encourages the establishment of
export-oriented enterprises or the use of advanced technology.”
The first clause of Article 3 in the Law of PRC on Foreign Capital Enterprises is forbidden by the WTO
rules, and it does not conform with market economic principles. Since China is changing its planned economy
into a socialist market economy, the foreign enterprises, as well as the domestic enterprises, should enjoy full
freedom concerning what to sell and where to sell their products.
3.4 The production and operating plans
The first clause of Article 9 of Law of PRC on Chinese-Foreign Equity Joint Ventures, which says, “The
production and business operating plans of an equity joint venture shall be submitted to the competent
authorities for record and shall be implemented through economic contracts” was deleted.
The first clause of Article 11 of the Law of PRC on Foreign Capital Enterprises, which says, “The
production and operating plans of enterprises with foreign capital shall be reported to the competent
authorities for record” was also deleted.
The above two clauses were deleted because they were drafted under the centrally-planned economic
system. Under the socialist market economic system, the government exercises only macro-control over its
economy. It does not interfere in the production and operating plans of the enterprises; therefore, all the
enterprises should enjoy full freedom concerning their production and operating plans. Although WTO rules
do not touch upon the above two deleted clauses, it is self-evident that they are outdated under the socialist
market economic system.
4 Potential Effects of China’s Revised FDI Laws and WTO Entry on Inward FDI in
Different Industry Sectors
China’s revised FDI laws will certainly increase foreign investors’ confidence in China and will have very
positive effects on China’s inward FDI. It will further speed up China’s process to join the WTO. After China
has become a member in the WTO, China must abide by all its agreements with WTO members. Many sectors
in China will no doubt be affected, including telecommunications, insurance, banking, securities, audio visual,
and professional service sectors, to name just a few. They will all have expanded market access to China.
Internet services will be liberalized at the same rate as other key telecommunications services. While China’s
WTO membership will affect competitiveness of domestic industries, it will also affect patterns of FDI inflows.
Such impact may vary with the industrial sectors.
WTO entry will bring about the following changes in the banking sector:
a) U.S. banks will have full market access in five years .
b) Foreign banks will be able to conduct local currency business with Chinese enterprises starting two years
c) Foreign banks will be able to conduct local currency business with Chinese individuals from five
years after accession.
d) Foreign banks will have the same rights (national treatment) as Chinese banks within designated
e) Both geographic and customer restrictions will be removed in five years.
f) Non-bank financial companies can offer auto-financing upon accession .
These alterations will greatly change the present situation in which foreign banks are not permitted to do
business in local currency with Chinese clients. They are basically limited to servicing foreign-invested
companies in foreign currencies. While pilot projects allow some 30 foreign banks to engage in RMB
denominated business in the Pudong area of Shanghai and in Shenzhen, restrictions imposed on their
operations are such that the volume of transactions is too small to generate liquidity and profits.
Allowing foreign banks to perform all operations linked to international trade transactions, including in
local currency, would give a further boost to China’s trading base. Opening of the banking sector will not only
allow foreign banks to participate in the allocation of resources in the economy, but also facilitate operating
conditions for foreign investors (Houben, 1999). Thus, more investors are likely to invest in China.
China will permit minority foreign-owned joint ventures to engage in fund management on the same
terms as Chinese firms. As the scope of business expands for Chinese firms, foreign joint venture securities
companies will enjoy the same expansion in scope of business. Minority joint ventures will be allowed to
underwrite domestic securities issues and underwrite and trade in foreign currency denominated securities
(debt and equity). Permitting foreign investors to participate in the securities market will help broaden
China’s capital market in the most rapid way. It thus will bring expertise, training, technology, as well as
competition and benchmarking to the industry, and will result in the most efficient channeling of household
savings into investment.
While the United States agreed to China's request to limit foreign equity participation in value-added and
paging services to 50 percent, China agreed both to accelerate significantly the percentage of equity
participation in the first two years and to eliminate geographic restrictions on an accelerated basis. China has
indicated it will allow 35% foreign ownership for value-added and paging services two years after accession
and 51% four years after accession. China will allow 49% foreign ownership in the first year of accession and
50% foreign ownership in the second year. China's commitments mark its first agreement to open its
telecommunications sector, both to the scope of services and to direct investment in telecommunications
businesses. Through these commitments, China will become a member of the Basic Telecommunications
Agreement. Concerning the scope of services, China will phase out all geographic restrictions for paging and
value-added services in two years, mobile/cellular in five years, and domestic wire line services in six years.
China's key telecommunications services corridor in Beijing, Shanghai, and Guangzhou, which represents
approximately 75% of all domestic traffic, will open immediately to accession in all telecommunications
services. Under the present circumstances, China allows no foreign investment in telecommunications
services. With this agreement, China will allow 49% foreign investment in all services, and will allow 50%
foreign ownership for value-added paging services in two years, 49 % for mobile services in five years; and
49 % for international and domestic services in six years. Such commitments will accelerate FDI in this sector,
as already seen in Motorola’s recent investment in China, which more than tripled in a year’s time.
4.4 Auto sector
China will cut tariffs from the current 100% or 80% level to 25% by 2006, with the largest cuts in the first
few years after accession. Auto parts tariffs will be cut to an average of 10% by 2006. Auto quotas will be
phased out by 2005, and this phase-out will grow by 15% annually until elimination. China will gradually
open up its auto parts and services sector to foreign investors. As this sector is almost non-existent now, it will
become even more attractive to a large number of foreign companies, given that the automobile manufacturing
sector in China is becoming increasingly saturated and competitive.
4.5 Professional services
Currently in the professional services, China tightly restricts operation of foreign law firms and
accounting firms. In the Agreement, China has provided a broad range of commitments, including those on
legality, accountancy, taxation, management consultancy, architecture, engineering, urban planning, medical
and dental services, and computer-related services. China will permit foreign majority control except for
practicing Chinese law (an exception common to many WTO members.) For accountancy, China has agreed to
eliminate a mandatory localization requirement and will follow transparent procedures and allow unrestricted
access to its market to licensed professionals. Such commitments are of vital importance to facilitate the
adoption of market economy practices and to strengthen the rule of law.
While the United States agreed to China's request to limit foreign equity participation in life insurance to
50%, China agreed to accelerate significantly the elimination of geographic restrictions in the first few years.
According to the present Chinese law, foreign companies are restricted to operate in Shanghai and Guangzhou.
But under the agreement, the following conditions will ensue:
a) Geographic Limitations: China will permit foreign property and casualty firms to insure large-scale
risks nationwide immediately upon accession, and will eliminate all geographic limitations in three years.
b) Scope: China will expand the scope of activities for foreign insurers to include group, health, and
pension lines of insurance, which represent about 85% of total premiums.
c) Prudential Criteria: China will award licenses solely on the basis of prudential criteria, with no
economic needs test or quantitative limits on the number of licenses issued.
d) Investment: China will allow 50 percent ownership for life insurance. Life insurers may now
choose their own joint venture partners. For non-life, China will allow branching or 51% ownership on
accession and form wholly-owned subsidiaries in two years. Reinsurance is completely open upon
accession (100 percent, no restrictions). Liberalization in this sector will likely attract a large number of
foreign insurance companies to invest in China. Foreign investment in the insurance sector can bring
expertise, training, and benchmarking to the industry and thus result in bringing the sector up to
5 Implications for FDI Policy Formulation
WTO membership not only brings China into the last major international organization from which it is
still absent; it will also acknowledge the country’s emergence as a trading power and its readiness to assume
responsibility as an equal partner in a trading system that depends on the open markets of its important
members to thrive. China’s WTO membership has a direct impact on investors’ confidence, economic activity,
and growth. Setting out liberalizing investment measures to be implemented in steps over the next few years
will reduce the erratic nature of many regulatory changes and bring a steady and predictable rhythm of
economic reforms on which foreign investors can base their business strategies and expansion plans. It would
also instill enormous outside confidence in the government’s ability to deepen the reform process and establish
a full market economy (Houben, 1999).
Membership in the WTO will lead to a timely opening of previously unreachable sectors to foreign
investors. Inflow of FDI is much needed to boost employment at a time when state-owned enterprises are
shedding millions of employees. Opening the services sector and foreign investment regime, including
phasing out archaic mandatory joint venture requirements, would create a renewed interest in foreign investors
and thus create an enormous number of jobs, mostly at the upper end of the wage scale, as well as attract
know-how technology and state-of-art management techniques.
After China’s WTO entry, the Chinese economy will be much more open than ever before so that
overseas investors may enjoy easy access to those sectors previously prohibited or restricted by the Chinese
laws. By fulfilling the commitments in the WTO agreements China has reached with WTO members, China
will offer foreign investors additional benefits. Specifically, foreign investors will be treated as equals to
domestic investors. This new policy may lead to a stabilizing inflow of FDI. The dramatic reduction of import
tariffs will allow foreign commodities to enjoy easier access to the Chinese markets. This increase in foreign
goods, in turn, will dramatically reduce cost of goods made in China. Chinese state-owned enterprises will be
confronted with cut-throat competition from foreign businesses after they lose their protection from the
government. Their lack of funds, poor management, red tape, overstaffing, and low efficiency will put them in
a very disadvantageous position vis-à-vis foreign competitors in the same sectors. They will either “swim” or
be “drowned." Thus, these companies can be good candidates for mergers and acquisitions. Direct investment
through mergers and acquisitions will allow foreign companies to secure their market positions in China in a
short time. .
China has achieved remarkable success in attracting FDI in that China has been the biggest recipient of
FDI among the developing countries in the world and the second largest recipient of FDI in the world exceeded
only by the United States, for the last seven years since 1993. WTO membership should make China more
attractive to foreign investors and thus, the amount of inward FDI should increase dramatically. More inward
FDI will speed up China's economic development in the central and southwestern parts of China. FDI from the
West, which comes with international business practices, will facilitate the perfection of China’s market
economy and the Chinese economy’s integration with the world economy, thus allowing multinationals to
integrate their operations in China in their world networks.
In the past, China has mainly used fiscal instruments to attract FDI into targeted industries and
geographical areas. Multi-year tax breaks and tariff exemptions on imports of capital goods and inputs have
wooed multinationals to bring over US$348 billion of FDI to China between 1979 and the present (China
Daily, 6 April, 2001). While the incentive programs have been the hallmark of China’s FDI policy, the
pick-and-choose approach began to undermine the attractiveness of China as investment destination, as
evidenced by the waning interest among foreign companies.
Because the dramatic reduction of import tariffs will allow foreign commodities easier access to the
Chinese markets, some foreign companies may opt to produce the products at home and export them to China
simply to take advantage of low tariffs. This observation is especially true for high-tech products that cost very
low freight. Therefore inward FDI in hi-tech sectors may decrease. In addition, foreign investors in the free
trade zones, special economic zones, and economic and technological development zones cannot enjoy the
substantial preferential treatment that they used to. Their enthusiasm in investment and reinvestment in China,
therefore, may be dampened.
In order to avoid a dramatic downturn of inward FDI, the government should formulate conducive
incentive programs for foreign investors interested in investing in western and central regions and in high-tech
sectors. Streamlining the approval process will offer special incentives to high-tech investors who have to
face real-time competition and instant obsolescence of technology.
Success in attracting FDI can be ensured if a clear framework providing legal security and effective
property rights is backed up by strong regulatory bodies. Equally important is further strengthening of the rule
of law and regulatory structures, including transparency and prudential supervision.
Specifically, in order to encourage inflow of FDI, the policy makers should consider the following issues:
4.1 The red tape in approving FDI projects has to be done away with by further simplifying application
procedures. Corruption among FDI officials has to be eliminated in order to increase foreign investors’
confidence in China. Services should be easily and conveniently available to FDI businessmen.
4.2 The laws must be strictly enforced..
4.3 FDI in export-oriented sectors, hi-tech sectors, environmental protection, infrastructure and agriculture;
and FDI in the central and northwestern parts of China have to be encouraged. Preferential policies can be
offered to FDI in the above-mentioned sectors and to FDI in the central and northwestern parts of China,
as long as they are consistent with the WTO agreements China has reached with WTO members.
4.5 The Chinese government must exercise effective management and supervision over the banking sector so
that financial risks and crises can be averted.
As the WTO entry helps create a better investment environment in China by bringing Chinese rules up to
global standards, raising transparence, and helping eliminate corruption, thereby bringing China into the new
century, China’s inward FDI will no doubt accelerate China’s entry into WTO, will provide both overseas
investors and China’s domestic enterprises with more opportunities. If China takes advantage of the
opportunities and meets the challenges with confidence and caution, China will surely speed up its economic
integration into the world economy and the perfection of its system of socialist market economy. As a result
China will benefit greatly from its WTO entry and turn itself into an economic giant in the foreseeable future.
 Almanac of China’s Foreign Economy and Trade, various years
 China Statistical Yearbook, various years
 Hill, Charles, International Business: Competing in the Global Economy, Irwin-MaGraw Hills, 2000
 Houben, Hiddo 1999. China’s economic reforms and integration into the world trading system, Journal of
World Trade, 33 (3): 1-18
 Shi Guansheng, Explanation of China’s Revised FDI Laws, October 23, 2000
 Summary of U. S.-China Bilateral WTO Agreement, The White House Office of Public Liaison,
November 17, 1999
 WANG Guo-an, YAANG Xiao-hua. Influences of China Entering into WTO on Foreign Direct Investment.